I am curious about how the commission amount is determined. Is commission based on lock terms or total gross?

Has this impacted loan quality or made loan officer/producers more cooperative in obtaining post closing conditions? Or more understanding with salability concerns?

Since the work continues after the loan is funded, it does not seem unreasonable to compensate LOs when the loan is sold instead of funded. However, it would be depend on how loans are priced and commission is calculated. Doesn't matter what I think anyway because its between you and your employees. I admit that I am just curious.

I respect you coming to ML and participating in forum discussions to answer questions and provide facts.

_________________"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe." -Albert Einstein

Our secondary marketing department hedges 99% of our production, and we deliver to our investors through AOT (Assignment of Trade) or we will pair out of our hedge coverage and take out a short term mandatory commitment with our investors. In either scenario, we do not assign or take out the commitment with an investor until we have a fully funded loan in hand, and therefore do not know what our profit or loss on the loan will exactly be until after the loan is funded.

Internally, for our retail, we generate our own best efforts rate sheet that they can use to lock with the secondary marketing department to know with certainty what they will be paid if the loan funds. In this manner, we can manage the flow of business to our investors, enjoy the benefits of AOT and mandatory pickup as compensation for the risk we take on in hedging our pipeline, and guarantee near-100% pull through to our investors, which keeps them happy. And even though we are exposed to hedging fluctuations and expansion and contractions in mandatory vs. best efforts spreads at any given time, sales knows with certainty what they will get paid on a loan.

Commission to retail loan officers is based off of a varying commission split, by channel of retail, that considers both the fees charged on the front of the loan, and any premium pricing that would be earned as calculated by the internally generated best efforts rate sheet. By "channel of retail," I mean Direct Lending (call center), Outside Sales, and Affiliate Branch. Different commission splits and rate sheets apply to each individual channel (they essentially function like different businesses), as do varying levels of support, depending upon what a loan officer needs. Some loan officers have their own book of business; others need to a lot more hand holding. More support = lower commission split; Less support = higher commission split. For example, a loan officer with their own book of business requiring very little support in our Outside Sales channel of retail would receive a 100% commission split of their front end fees and rate sheet pricing. An affiliate branch employee might receive a higher level of support from the local branch manager and receive a 50% split, for example. A Direct Lending (call center) employee, who has access to our past retail client list and other lead sources, might be at a 30% split. In the end, we let the free market operate and let the loan officer choose which arrangement suits them best. We hope to cater to all of the varying needs out there.

Wholesale sales personnel are paid based upon a multiple of basis points times dollar volume of production. The individual AE (account executive) receives 18 basis points per loan. The regional manager receives 3 basis points per loan, the overall sales channel manager receives 3 basis points per loan, and our corporate sales trainer, who trains both the AEs and our customers, receives 1 basis point per loan. So it's 25 basis points to the company in "all-in" commission expense. I'm told this is high for the industry (8-10 bps is more normal), but it's a tough world in which to be a commission-only sales person these days. And since it is a totally variable cost model for us, we are able to reduce our degree of operating leverage (risk) associated with ramping the channel up or down.

Frankly, I would say it is too early to tell whether there will be a material impact on loan quality since we just put the new policy of when commissions are earned into effect with loans closing in February. Regarding cooperation among staff, we never really had any significant issues there - our people seem to play well together in the sandbox for the most part, as far as I can tell. From a raw game theory standpoint, I have to believe it won't hurt, though. My point of view on checks and balances is that it just keeps honest people honest - know what I mean?

Change in life and in business is often times met with resistance, and perception of the value of change usually depends upon one's vantage point. For example, when business contracts, if you give someone that is making $10,000 per month a pay cut to $5,000 per month, it is perceived as a negative. But take the guy that's unemployed and offer him that same $5,000 per month and you have someone excited about the relationship. I'm just using this example to make the point about perception; no one at Assurity took a pay cut as a result of the policy change - we just changed the mechanics of when commissions are earned and tried to align everyone's goals with the overall goals of the company (delivering good quality loans free of manufacturing defects to our investors). You know, that whole, "What's good for the goose is good for the gander" kind of thing.

_________________"When they came for everyone else, I said nothing. Then, when they came for me, there was no one left to listen."

So basically, the loan officer isn't at risk of losing commission, can still "lock in" their commission, and the only thing that is changing is when the commission is considered earned and payable? It seems like a reasonable way to manage cash flow. I wouldn't be surprised to see other companies follow your lead.

At the risk of inciting a lynch mob, it would be interesting to see this type of thinking (not actual practice) applied to brokered loans. By this, I mean getting brokers vested in the entire process- and not just funding.

This brings up the issue of third party originations and the growing wariness of TPOs in the industry.

Chase is out of TPOs, and mortgage insurers Genworth, PMI, and MGIC have followed suit. With the consolidation in the industry, if this trend takes hold, brokers and wholesale lending could be squeezed out.

Do you have any plans to help preserve your wholesale channel for brokers? What about improving TPO loan quality and lessen the prepay rate? Do you see any change in the broker's role or how TPO's are processed?

I would like to know your thoughts. I haven't read your other threads, so if you have already addressed this, please post the link.

Thanks.

_________________"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe." -Albert Einstein

Calvin; you have given all of us a great insight or a different way to look at some of the issues in our industry. Thank you for your candor.

Questions;
We are about to have another hughe batch of forecloures coming to market. Many FHA Lenders have changed minimum requirement of fha loans to a 680 score, so it is possible many more will.

1. Are many investors doing this because they fear that the FHA insurance fund will be to underfunded for the insurance guaruntee to be beneficial or if the fund runs dry it will take to long for the Goverment to replenish it so the carrying cost will be to great.

2. With the next influx in homes coming to market, and the increased score requirement is going to limit the number of borrowers, is anyone afraid that this is again going to affect housing prices, ie. another drop in value due to limited buyers??

So basically, the loan officer isn't at risk of losing commission, can still "lock in" their commission, and the only thing that is changing is when the commission is considered earned and payable? It seems like a reasonable way to manage cash flow. I wouldn't be surprised to see other companies follow your lead.

Correct â the loan officer (or account executive) is not at risk of losing commission (as long as their clients actually lock their loans). Wholesale customers and retail loan officers can lock in their commission by taking out a best efforts lock with our secondary marketing department. In fact, I PREACH over and over and over again to our employees and our wholesale customers, in meetings, on conference calls, through email, through newsletters and even through various market updates that I write and we archive and post on our blog (we call it the Assurity Wholesale News Center), http://www.assuritywholesale.com/blog, LOCK âEM IF YOUâVE GOT âEM. Anyone who doesnât lock risks their own commission. The philosophy is to not try to time the market because as mortgage professionals, our job is not to try to play the role of mortgage bond trader and warm up the crystal ball at the expense of our customers and our pipelines, even though there are some very expensive advisory services out there that try to get people to pay for advice on how to do just that. How many people got burned between the recent MBS price highs (yield lows) of January 8th and MBS price lows (yield highs) of January 29th? Rates still havenât gotten back where they were . . .

Quote:

At the risk of inciting a lynch mob, it would be interesting to see this type of thinking (not actual practice) applied to brokered loans. By this, I mean getting brokers vested in the entire process- and not just funding.

You are right about the difference between theory and practice on that one! As a practical matter, your funding department would end up having to have two sets of wires for each loan (one to fund the loan and one to pay the broker their fees + yield spread premium), and your accounting department would therefore have twice the work, as well. Iâm sure a good RESPA attorney would opine that there would be legal problems with having an exchange of funds away from what is shown on the HUD-1 settlement statement, which documents all of the flow of money at the closing table, as well.

That being said, I can honestly say that we have had very few problems with brokers helping to chase down an investor suspense item condition or obtain the borrowerâs initials on a form that was missed at closing, or whatever. Our sales staff has been great about helping to facilitate the process in these situations, as well. This tells me we have a good manufacturing process, as well as a great sales staff and portfolio of wholesale customers.

Quote:

This brings up the issue of third party originations and the growing wariness of TPOs in the industry.

Chase is out of TPOs, and mortgage insurers Genworth, PMI, and MGIC have followed suit. With the consolidation in the industry, if this trend takes hold, brokers and wholesale lending could be squeezed out.

Do you have any plans to help preserve your wholesale channel for brokers? What about improving TPO loan quality and lessen the prepay rate? Do you see any change in the broker's role or how TPO's are processed?

I would like to know your thoughts. I haven't read your other threads, so if you have already addressed this, please post the link.

Thanks.

Okay, hereâs the issue where I, and Assurity Financial Services, have taken a calculated stand. Honestly, only time will tell if we will have made the right decision, but I can assure you the decision and commitment have indeed been made to continue to AGGRESSIVELY invest in our wholesale channel. If I could share just one takeaway from my Wall Street career, it is that being a contrarian at the right time can be wildly profitable. Generally speaking, crowd mentality provides an opportunity for the cunning wolf to act upon the fight or flight instincts of its prey.

You know, wholesale used to be thought of as a âlow margin businessâ. I have news for you all: Itâs not anymore. With fewer choices left, every single one of us has increased our margins, actually making this channel of business, which is generally accepted as a low cost source of origination volume, perhaps more attractive from a return-on-investment standpoint, than ever. Why do you think it is that I can afford to pay above market to my AEâs? Iâm not running a charity here â we increased our margins, along with everyone else. For goodnessâ sake, they preach this stuff about wholesale being a low cost source of origination to you at the MBAâs School of Mortgage Banking!!! The story line goes like this: You donât have to invest in an expensive brick-and-mortar branch network, and there is a different liability profile related to the loan origination when itâs a third party versus your own W2 employee that just did something wrong. I started a thread here on these forums on January 15th called, "How often is wholesale masked as retail?" to bring up the topic that "retail" ain't really "retail" anymore, baby! Here's that link: http://forum.ml-implode.com/viewtopic.php?t=92017

The market dynamic that is different these days is that, rather than having a free market where brokers have many choices, we are now an oligopoly (perhaps on our way to a monopoly). Hey, if youâre the guy thatâs still in business at the end when the turkey gets carved and only shared among a few, that ainât the worst thing in the world â Iâm just trying to arrange a seat for us at the table!

Why do you think it is that the big banks want to scare the bejeezus out of everyone else in the world to even sit down? Just step back and look at their actions: Not all of the aggregators have exited, but there is a definite collusive effort to raise the price of poker to play in the TPO game, it seems. And Iâm going to conjecture that even those that were the subject of recent market-rocking headlines that they are now out, have given the market a temporary head-fake out of self-interest. Furthermore, as I brought up in the thread I mentioned above about wholesale being masked as retail, IF YOU GO TO HUD'S NEIGHBORHOOD WATCH SITE AND LOOK FOR YOURSELF, WELLS, COUNTRYWIDE AND CITI HAD BETTER PERFORMANCE ON THEIR WHOLESALE FHA LOANS THAN ON THEIR OWN RETAIL FHA LOANS - BY QUITE A BIT! Self interested with hunt for TPO to increase market share? Methinks the answer is indeed, "YES."

Regarding the MI companies, it's obvious that they really are just broke. But the good news for mortgage brokers, as I pointed out in a thread I started called "Mortgage Insurance solution for mortgage brokers!", which you can find here, http://forum.ml-implode.com/viewtopic.php?t=96475, is that THIS WILL JUST MEAN FHA MARKET SHARE WILL GROW, SO THOSE OF US WELL-POSITIONED IN THE FHA LENDING SPACE WILL ACTUALLY BENEFIT FROM THE MI COMPANIES EXITING. Want proof that they are just broke and not just a stooge of the aggregators in furthering the anti-TPO agenda, which even a conspiracy theorist like myself would have previously thought? I would like to enter into evidence the following email directly to me from PMI (we didn't send them much business anyway). Notice that the reasons given in the email have to do with SEVERE CAPACITY CONSTRAINTS, and the restriction is not just for TPO, like many have read on these forums. They even used my first name - I haven't received a "Dear Calvin" letter in a while. Here's the love letter for your reading pleasure:

**********

Dear Calvin,

As a result of the ongoing instability in the marketplace, the mortgage insurance industry is facing severe capacity constraints and must take immediate steps to manage the volume of new insurance commitments from a risk and capital standpoint.

Therefore, based on todayâs market conditions and PMIâs current capacity limitations, we regret to inform you that, effective February 25, 2009 and until further notice, we will suspend issuance of new mortgage insurance certificates under your Master Policy.

We will continue to process applications received and honor any commitments issued prior to February 25, 2009 in accordance with our Master Policy. In addition, we will continue to service your insured loans that are currently in our portfolio.

Please notify all appropriate personnel in your branches about this suspension announcement.

We sincerely appreciate your business and look forward to working with your organization again as soon as conditions permit.

**********
Getting back on track, to me the external risk in the wholesale channel from a S.W.O.T. analysis point of view, is that those of us that are in the middle may all get trampled by the ones that REALLY stand to roll in the dough at the end of the day when they have all of the business to themselves (read also: the TARP-funded AGGREGATORS). But the risk in fighting the fight may be worth the reward in the end, so at this point I remain steadfastly committed. Besides, those of us that havenât sold our souls to the devil (read: government) and accepted TARP funds have a competitive advantage: We donât have to worry about limiting ourselves in the talent we can attract by B.O.âs $500,000 executive salary cap. I would slit my wrists if I knew there was a finite amount of money I could earn for opening myself to infinite risk. At the risk of digressing too much here, which I have a tendency to do, there was a hilarious article on Bloomberg the other day where they interviewed the CEO of Rickâs Cabaret, which operates a chain of strip clubs, and the guy said there was no way he would take a pay cut to run a major bank. Personally speaking, I need to make up for lost time; my partner and I took ourselves completely off the payroll in June of 2008 and didnât receive another paycheck the rest of the year, in order to make the company work while we downsized in 2008 to position ourselves for success in 2009 and beyond. I suspect that many others that have made similar sacrifices and are still âin it to win itâ also have their eye on large upsides for the pain and risk they have endured. Why else would you take the risk? And this is still America where we're not supposed to apologize for success and trying to do better for ourselves, right?!? Well, I realize the jury is out on that one, and if the verdict comes back "guilty" on capitalism, I guess I'll be the first in line for my government cheese . . .

This captain has no desire for the ship to go down, so we are full speed ahead in wholesale, battening down the hatches, heading into the storm, looking for a few brave sailors who dare to tempt the shark infested waters with us. Itâs not for the faint of heart these days, that much is for sure. If the forces of nature sink us, at least I will be able to sleep at night knowing I gave it my all and did everything I could for my crew. And what the heck â Iâm 35 years old, so itâs not like I canât start over again if it doesnât work out. I started out poor and Iâm not afraid to go back and climb the ladder quicker the second time around. We grub-staked Assurity with $66,000 on 1/31/02 and financed the company 100% through retained earnings the whole way â it can be done again, especially now that I have half a clue what mortgage banking is all about, which I honestly didnât when we started.

Wish us luck, because we are going to need it. Hope to see you all on the other side, and thanks for listening to me rant.

_________________"When they came for everyone else, I said nothing. Then, when they came for me, there was no one left to listen."

Calvin; you have given all of us a great insight or a different way to look at some of the issues in our industry. Thank you for your candor.

Questions;
We are about to have another hughe batch of forecloures coming to market. Many FHA Lenders have changed minimum requirement of fha loans to a 680 score, so it is possible many more will.

1. Are many investors doing this because they fear that the FHA insurance fund will be to underfunded for the insurance guaruntee to be beneficial or if the fund runs dry it will take to long for the Goverment to replenish it so the carrying cost will be to great.

2. With the next influx in homes coming to market, and the increased score requirement is going to limit the number of borrowers, is anyone afraid that this is again going to affect housing prices, ie. another drop in value due to limited buyers??

Thanks for your comment, and these are great questions!

1.) Investors couldn't care less about the FHA insurance fund. FHA borrowers pay the premiums, both in the form of their up-front MIP and their monthly MIP. The investors are the ones that benefit when they make a claim, and hey, this is the government we are talking about, remember? They always have that printing press during tough times.

Reality is that the FHA Insurance Fund would be considered fraudulent for a couple of reasons if operated the same way in the private sector. First of all, they changed the rules on refundability of FHA borrower up front MIP a couple of years ago to where people can no longer get cash refunds of the unearned balance in their MIP accounts (they used to be able to, until HUD / FHA got tight on cash). So, you could get an FHA loan and pay that UFMIP into your MIP account with HUD, which is used up over 5 years, sell your house (or get foreclosed on) in 1 year, and HUD won't refund you, by their definition, what amounts to your "unearned" premium. Um, if any insurance company in the private sector collected premiums for a coverage period and you cancelled the policy before the coverage period was up (like on your car insurance, for example), you would get a refund of what you had prepaid.

Second, new FHA borrowers paying into the fund are putting in money to be used for claims arising from borrowers that got their FHA loans years ago and have since gone into default. So new people coming in pay for old people going out - just like how Social Security works (and why it ultimately won't work). Does anyone know the definition of a "ponzi scheme"?

2.) Yes, increasing FICO score requirements and other credit tightening restrictions will have an adverse impact on housing prices. This is simple supply and demand in action: Lower demand, in the form of fewer buyers that meet the new qualifications results in lower prices as the market goes through the price discovery process to establish its equilibrium point. In response to your question of is anyone "afraid" this will affect housing prices, I can't speak for everyone, but to me its a simple axiom of economic reality, not having much to do with belief or emotions such as fear. Philosophically speaking, I hope we haven't gotten to the point as a society that our overall goal is asset price inflation at all costs, and that we generally accept homeownership as some divine right rather than a privilege to be enjoyed by those that are willing to accept the responsibility of fiscal discipline associated with such an important commitment. Don't misunderstand me here - there's a difference in being afforded the opportunity to literally have shelter versus own a capital asset. Many times, I think, we confuse the social values and the line gets blurred between the two. Heck, I even think that's what got us into this mess in the first place!

But that's just my opinion and what do I know . . .

_________________"When they came for everyone else, I said nothing. Then, when they came for me, there was no one left to listen."

Great posts Calvin. I have had nothing but good experiences with your Wholesale Channel. Thank you for more insight and now that you have helped us all go play some GOLF!

Ha! If you only knew I was a 23.6 handicap.

Unfortunately, the par 3 in front of my house in Castle Pines is covered with snow. Otherwise, I would be out there, so I'll somewhat admonish your wish and pour a scotch and light up a stogie this evening and plan my spring time assault on getting my "game" into the teens!

Plus, I gotta get into character as a cigar chomping banker, whether I own one by simple virtue of being a taxpayer, or whether one may eventually own you and me.

Thanks for the well wishing, my friend, and thanks for your business!

_________________"When they came for everyone else, I said nothing. Then, when they came for me, there was no one left to listen."

Calvin, thank you for some very intelligent, insightful and entertaining posts. Youâre making me fall in love with capitalism all over again.

I agree with your assessment that the TARP institutions are playing dirty to win market share. This is an excerpt from Chaseâs wholesale exit memo that is posted on their wholesale site.

Quote:

Moving forward, we have decided to focus on loan originations through Chase bank branches, our Consumer Direct business, and retail-originated loans acquired from Correspondent lenders. Our new strategic direction is supported through the recent merger with Washington Mutual, which increased our bank branch inventory nationwide and enables us to serve nearly 70 percent of the American population

I wonder how many mortgage jobs they plan on outsourcing.

As far as MI goes, I agree that MI companies are financially impotent. Their restrictions on credit scores, LTV, etc. have pretty much handed the market to FHA.

I hope that your company will be able to continue to provide brokers a viable channel.

_________________"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe." -Albert Einstein

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